Switzerland and the UK agreed a landmark tax agreement in August 2011 which was then formally signed in October. At the time the UK Treasury said it would ?resolve the long-standi
Switzerland and the UK agreed a landmark tax agreement in August 2011 which was then formally signed in October. At the time the UK Treasury said it would ?resolve the long-standing abuse of Swiss banking secrecy?. Germany signed a similar agreement with Switzerland, but the European Commission challenged both deals, asserting that they were not compatible with EU law and were undermining the EU?s own savings tax strategy.
The UK/Swiss agreement has now been revised to appease the European Commission (EC). A Protocol of Amendment to modify the deal accordingly was signed in Brussels on 20th March, and, as planned, Switzerland will start to tax all bank accounts owned by UK residents from January 2013.
Switzerland had been trying to finalise both the UK and German deals so that Swiss bank have enough time to set up their systems to deduct the withholding taxes from January 2013. The UK deal still needs to be formerly approved by each country?s parliament, but it is still expected to commence next January.
Although the legal structure of the agreement has been amended, for Swiss bank account holders not much has actually changed. If anyone was hoping they would get to avoid the 48% withholding tax they will be disappointed.
One of the key elements of the original deal was that interest income earned by UK residents in a Swiss bank account will have a 48% withholding tax deducted at source, which will be sent to the UK Treasury anonymously. The EU, UK and Switzerland already apply a deal covering taxation of bank interest ? the EU Savings Tax Directive agreed in 2004 ? whereby Switzerland deducts a withholding tax, which is now 35%.
The main change now is that interest income is nominally excluded from the agreement?s scope. Instead, it remains subject to the existing 35% Savings Tax Directive withholding tax. However, an additional 13% ?tax finality payment? will also be levied on the income to ensure tax compliance so together the rate remains 48% as previously agreed.
The Swiss Federal Department of Finance statement said: ?Effectively, nothing will change for bank clients; their tax obligations will be fulfilled? The concerns of the EU Commission regarding compatibility with EU law have been removed.?
As stated in the original deal, investment income earned by British residents in Swiss financial institutions will also be subject to 48% withholding tax, while dividends will be taxed at 40% and capital gains at 27%.
Also as part of the original deal, a retrospective one-off tax of between 19% and 34% will be deducted and paid to the UK. This ?regularisation payment? is to make up for tax lost in the past on the undeclared account. The amount deducted will depend on how long the assets have been held and their value ? potentially a third of the account could be lost.
Both the future and retrospective withholding taxes will not apply to anyone who authorises their bank to disclose their account to HMRC, and declares and pays tax on the capital in their UK tax return.
HMRC will also be able to submit up to 500 information requests a year and Switzerland will have to respond. HMRC only needs name the suspected tax evader; it does not need to name the bank.
The March 2012 agreement does include one significant new element, which is that inheritance has been brought under the terms of the agreement.
When the holder of an undisclosed Swiss bank account dies, 40% of it will be deducted and paid to the UK Treasury unless the beneficiary agrees to disclose the account to HM Revenue & Customs.
After the protocol was signed, Dave Hartnett, permanent secretary for tax at Revenue & Customs said:
?What was already a highly effective weapon to tackle offshore evasion has been further strengthened through the new provision to deter the evasion of inheritance tax. It is excellent news that, following constructive discussions with the European Commission and the Swiss Government, we can now move forward to implement an agreement which will secure billions of pounds of unpaid tax for the UK Exchequer.?
This tax deal, as well as the one being agreed with Germany, suits Switzerland since all payments are made anonymously and so it gets to keep its prized banking secrecy. At the same time it keeps the UK and Germany happy because they no longer lose tax revenue on undeclared Swiss bank accounts.
Swiss President and Finance Minister Eveline Widmer-Schlumpf said: “With this model, withholding tax, we have a good means to meet possible justified claims of the taxpayer's home country, and still [respect] our Swiss legal system that grants anonymity to the taxpayer. We have a good model to meet both requirements.”
It is understood that Switzerland would like to move on to agree similar deals with other European countries. While some would be happy to just receive the withholding tax, others like France have so far continued insisting that Switzerland should move to automatic exchange of information. This is also the ultimate aim of the EU?s Savings Tax Directive.
The German/Swiss deal has faced resistance not only from the EU but also from opposition parties within Germany who are opposed to the fact that ?old money? held in Switzerland is only subject to the a one-off tax of between 19% and 34% to legalise their accounts.
With tax rules frequently changing, you should seek advice from a firm like Blevins Franks to establish which is the most tax effective way to hold your wealth, and to ensure your tax planning is compliant with your country of residence?s tax laws.
By Bill Blevins, Managing Director, Blevins Franks
22nd March 2012
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.